Maria Mikhailenko: Why it is Necessary to Create Clusters at Ukrainian Ports

Maria Mikhailenko Principal at Roland Berger Strategy 08 April 2013 15:01

International consultants invited by the Ministry of Infrastructure are proposing that Ukraine consider the possibility of the cluster system for development of ports. Today, one can speak not only about the fact that many ports in Europe and the world have chosen this route, but also about the fact that clustering, along with inter-modality and containerization, has become the irrevocable global trend in maritime trade. Maria Mikhailenko, a principal with Roland Berger Strategy Consultants, talks about whether such a scenario is possible in Ukraine and its possible benefits.

What is the essence of the cluster form of organization of production and what are its advantages?

Clusters began developing in Europe around the 1950s. The essence of this form of organization of production is that companies with similar specialization or located close to each other began to work more closely together with the aim of gaining certain competitive advantages. The uniting factors could be a common cargo base or a similar supply chain. Companies operating in clusters reduce costs through integration of their value chain or through horizontal synergies of their common logistics.

Why is it advisable to create clusters specifically at ports?

Later, in the 1990s, clusters began to be formed at transport hubs. Ports are the most natural base for such transport clusters because they are a clear and understandable point of entry/exit for products. The examples of such cluster hubs in Europe and the European Union are the ports of Rotterdam, Amsterdam, and Gent.

What does a port need to transform from a hub into a cluster?

It happens when the value of a port gradually begins to go beyond that of a transport hub, i.e. a place where cargo is merely transshipped, because the processing of goods also moves there - for example, concentrates are processed or repackaged. That is, any process by which a product slightly changes its original form and assumes a form in which it is better prepared for immediate consumption. This creates added value for goods, including in the form of additional taxes into the state treasury or additional jobs.

Do you think that this concept is also applicable to Black Sea ports?

Yes, definitely. Clustering processes can already be seen at Russian and Turkish ports, as well as at Constanta.

Could you give some examples of Black Sea ports that have successfully implemented such a system?

The best examples are probably not at Black Sea ports, but at Baltic ports. One of them could be the Russian port of Ust-Luga on the Baltic Sea, where an industrial zone that includes facilities for production and processing of goods is planned on 2,000 hectares of land next to the port. For example, production of plastics, value-adding logistics, manufacturing of steel structures, etc.

It is necessary to keep in mind always that a port is not a 100% market mechanism because it is a specific infrastructure.

By analogy, approximately the same thing is planned at the Taman port. In Novorossiysk, which mostly specializes in bulk cargo, it would be logical to create clusters for processing crude oil. However, this port is not a good example.

Why?

On the one hand, it specializes in the transshipment of crude oil and there is a petroleum refinery on its territory, i.e. some sort of processing of products takes place. On the other hand, it is a port with limited capabilities because of its very close proximity to the city, and the factor of growth opportunities must be taken into account when developing a cluster strategy.

But it is the same in Odesa. Do you consider this city among the promising cities for creation of clusters?

Odessa is not quite the same. The port there is a little differently located, it is possible to exit to the adjacent territory, and there are unused areas within the port. Therefore, we consider Odessa as a base region for several clusters.

What steps are required today from the state for clusterization of ports to become possible?

It is necessary to work in two directions. The first is creation of the infrastructure needed by investors. The government, for its part, provides a platform around which production can be created subsequently. The second is determination of the fiscal measures necessary for establishment of such production facilities. Possibly, it could be creation of preferential tax zones. In this case, it will be more effective if they are not special zones but, say, preferential tax zones that are dependent on the degree of processing of goods. That is, the higher the degree of processing of goods, the lower the taxes.

What direct economic effect can be expected?

European examples show that one stone can be used to kill two birds in this way. Firstly, the volume of cargo transshipment increases and the general performance of ports increases due to the concentration of cargo bases. Secondly, the proportion of goods with a high degree of processing increases. In other words, the added value of goods produced domestically increases. For now, unfortunately, Ukraine is an exporter of mainly raw materials. In part, this is because there are insufficient incentives for producers to create added value. Exports are mainly commodities such as coal, grain, and iron-ore concentrate after their primary processing. Of course, concentration of production in clusters is only a pinpoint solution, it but can raise the volume of exports to a new level.

On what basis do you propose creation of clusters of one type of specialization or another in various regions?

There are presently 18 state-owned ports in Ukraine plus private terminals. They are all competing with each other, and, as you know, competition reduces margins. Thus, more problems than benefits are created for owners of ports because the benefits to the state are always calculated in terms of the amount of taxes generated. We have proposed creating transport and industrial clusters at ports specifically to avoid the duplication of the functions of various ports and to distribute the cargo base effectively.

What factors were taken into account when determining possible regions for future clusters?

The factors are the current level of utilization of ports, opportunities for expansion, and a number of transport criteria, such as delivery opportunities and the capacity of the surrounding infrastructure. Because it is clear that no matter how big a port we build and no matter how effective the cluster created there, these will not work because of the capacities of the railway stations that we currently have. That is, it is necessary to see whether the port has a place for location of logistics, whether it can grow, and by how much it can grow.

Don’t you think that compulsory distribution of cargo traffic amounts to administrative interference in an area in which only market mechanisms should operate?

On the one hand, it is impossible to disagree with this, of course. On the other hand, it is always necessary to have in mind that a port is not a 100% market mechanism because it is a specific infrastructure. Its facilities require significant investment on the part of the state. These include the water body, the rail infrastructure, all types of roads, interchanges, and structures - all the things that no single private investor can handle. Therefore, the state has the right to expect that these investments will somehow return to it in the form of budget revenues. In addition, it makes preliminary calculations on how much money it can get back for every dollar of investment. That is, we can say that the government does not interfere but rather manages. 

What kinds of clusters at Ukrainian ports can we speak of today, and what are their specializations?

Considering the cargo base that has already been partially created, it definitely makes sense to concentrate transshipment of iron ore, coal, and steel at the Pivdennyi and Odesa ports. Container terminals have already been created and they are successfully being operated at these ports, so we would also suggest creating an Odesa-Pivdennyi-Illichivsk container cluster. Specifically, a container cluster could also become a zone of industrial processing of goods. The convenience would lie not only in the fact that containers would be coming to a single region, but also in the fact that they would be processed there and subsequently their modality would be changed or they would be reprocessed. A grain cluster could also be created based on the Odesa and Illichivsk ports and a chemical cluster at the Pivdennyi port. These production facilities are already there in one form or another. 

What potential increase in cargo traffic can we expect if the cluster strategy is implemented?

We estimate that the cargo turnover of Ukrainian ports can increase by 50 million tons by 2027, taking into account the changes in the structure of cargo traffic, including changes resulting from the fact that ports will no longer compete with each other. This projection takes into account the tendency toward the loss of transit cargo, which will continue to fall. This will be due primarily to the commissioning of new transshipment facilities in Russia and in the southern part of the Black Sea basin. It is hardly worth hoping for the return of transit cargo, but, according to our estimates, it could be replaced. 

With what?

Ukraine is located aside from the global maritime traffic, so its participation in it is limited. However, if the TRACECA international transport corridor is created, one might well hope for that. 

What are the conditions necessary for its creation?

This will happen if a number of countries reach certain agreements among themselves. Then, goods will be transported permanently from Asia through the Black Sea to Europe. 

What structure of cargo traffic serves as the basis for the growth forecast of 50 million tons?

We are primarily talking about exports because the cargo base follows the general trends in development of production and the economy. We can expect an increase in export volumes because we expect the country’s GDP to grow. In addition, it takes the forecast increase in imports into account, since the purchasing power of the population stimulates increase of imported goods. 

Should a substantial increase in container traffic be expected?

If the problems that are presently being created by railways – the problems of tariff policies and infrastructural bottlenecks - can are solved, then there will also be growth in the container-handling niche. In particular, partial re-orientation of containers from Novorossiysk is possible. Of course, all these predictions are being made with adjustments for the extent to which the state’s position will be proactive or reactive. It must realize that ports around the world are no longer seen merely as places for transshipment of cargo. What a client needs is service, and then it is necessary to take account of any details, starting with competitive tariff rates and ending with unimpeded through-shipment opportunities for the customer. 

Don’t the legislative changes that have occurred recently, particularly the adoption of the law on ports, run counter to the objectives of the cluster strategy?

I would say that these processes - the adoption of the law on ports and the drafting of the strategy for cluster development - are linked, but they are going in parallel. The Law on Ports is aimed primarily at attracting private capital for development of port infrastructure. Clusters are in the sphere of industrial policy, where development of a separate legal framework is necessary. When developing the strategy for the Ukrainian port industry with the aim of improving competitiveness, our only goal was to propose strategic development directions. 

Will the number of ports reduce as clusters are created or are they all worth preserving?

The cluster concept involves consolidation of market participants. The number of ports that exists today is no longer in demand now. It should be understood that all the ports were built during the era of planned economy, when the value of inland waterway transport and maritime transport as a whole was somewhat different. Now, everything has changed: from the economic model to the cargo base. Demand has declined at some ports while demand has increased for certain types of services. For example, the intermodal component has emerged in the logistics business, and it is now super-important. The discreteness that exists today in the industry prevents this system from being made well managed. Therefore, smaller ports will somehow merge with larger ones, possibly transform themselves into passenger ports, or remain cargo ports specializing in two or three types of cargoes. In any case, it is necessary to proceed from natural conditions: if there is cargo base, good; then, there will be a port here. This should be the primary justification.

Tags: seaport